A considerable amount of legislation and case law has built up around defining tax deductible expenses: rules are constantly being changed and clarified. Additionally, whether or not an expense is tax deductible can depend on the legal form of your business (i.e., whether you’re a sole trader or limited company) and even the timing of the expense for plant and machinery.
Many people ask an accountant to prepare their accounts which help to ensure that all tax deductible expenses, and only tax deductible expenses, are claimed in their accounts. Even so, many self-employed people understandably still want guidance as to what expenses they can and can’t claim.
Wholly, exclusively and necessarily
Self-employed workers (including those in partnership) can generally claim all expenses that were incurred wholly and exclusively for business purposes. If you had to buy a good or service for your business, the likelihood is you can claim for it. The most famous exceptions are gifts and entertaining expenses: client entertaining cannot be claimed at all, staff entertaining has a limit and gifts cannot be claimed unless they meet very stringent criteria.
Additionally, “dual purpose” expenses cannot be claimed as they are not incurred exclusively for the business. “Dual purpose” expenses are those that provide at least two, simultaneous benefits. For example, a freelance salesperson might buy a suit to enhance their professional appearance. However, clothes are worn for the warmth and decency of the wearer, and due to this dual purpose, which is not business related, ordinary clothing is not, unfortunately, a tax deductible expense.
Employees can only be reimbursed expenses by their company if they are incurred wholly, exclusively and necessarily for business. This is particularly important for company directors who might be seeking compensation from their company for the costs of using their home as an office. While a self-employed person may claim a proportion of some of the fixed costs of the home (such as mortgage interest), a company can only reimburse the company director the additional costs the homeowner has incurred. In practice, this amounts to the additional gas, electric, phone calls and metered water charges incurred.
Plant and machinery
Expensive pieces of equipment (including tools, vehicles, equipment, and fittings, etc.) are not deemed “expenses” as such but are claimed as “capital allowances” on your tax return, whether you are self-employed or a limited company. There is an “annual investment allowance” (currently £500,000) which limits the amount of expensive equipment that can be claimed in full when it is bought. Expenditure that exceeds the annual investment allowance is claimed in small chunks over several years. The annual investment allowance can be changed by the government yearly. It is well worth keeping an eye on the annual investment allowance and making sure you buy assets, and start using them (the criteria for claiming the cost) when you have unused annual investment allowance left.